Question

Mary Walker, president of Rusco Company, considers $33,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $28,000 in cash was available at the end of this year. Since the company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline in cash is puzzling to Ms. Walker.

Rusco Company Comparative Balance Sheet at July 31
	This Year			Last Year
Assets
Current assets:
Cash	$	28,000		$	48,600
Accounts Receivable		238,200			226,900
Inventory		261,700			203,800
Prepaid expenses		16,100			30,600
Total current assets		544,000			509,900
Long-term investments		129,000			185,000
Plant and equipment		886,000			763,000
Less accumulated depreciation		216,500			193,900
Net plant and equipment		669,500			569,100
Total assets	$	1,342,500		$	1,264,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	244,300		$	177,600
Accrued liabilities		9,300			17,600
Income taxes payable		52,400			45,500
Total current liabilities		306,000			240,700
Bonds Payable		239,000			126,000
Total liabilities		545,000			366,700
Stockholders’ equity:
Common stock		702,500			665,000
Retained earnings		95,000			232,300
Total stockholders' equity		797,500			897,300
Total liabilities and stockholders' equity	$	1,342,500		$	1,264,000

Rusco Company Income Statement For This Year Ended July 31
Sales					$	1,060,000
Cost of goods sold						662,500
Gross margin						397,500
Selling and administrative expenses						283,550
Net operating income						113,950
Nonoperating items:
Gain on sale of investments	$	26,500
Loss on sale of equipment		(8,600	)			17,900
Income before taxes						131,850
Income taxes						39,490
Net income					$	92,360

The following additional information is available for this year.

The company declared and paid a cash dividend.

Equipment was sold during the year for $54,400. The equipment originally cost $116,000 and had accumulated depreciation of $53,000.

Long-term investments that cost $56,000 were sold during the year for $82,500.

The company did not retire any bonds payable or repurchase any of its common stock.

Required:

1. Using the indirect method, compute the net cash provided by/used in operating activities for this year.

2. Prepare a statement of cash flows for this year.

3. Compute free cash flow for this year.

Answer 1

Solution 1:

Rusco Company
Statement of Cash Flows (Partial)
For year ended July 31
Particulars	Details	Amount
Cash Flow from Operating Activities:
Net Income	$92,360.00
Adjustments to reconcile net income to net cash provided by operations:
Depreciation Expense ($216,500 - $193,900 + $53,000)	$75,600.00
Gain on sale of investments	-$26,500.00
Loss on sale of equipment	$8,600.00
Increase in accounts receivables ($238,200 - $226,900)	-$11,300.00
Increase in inventory ($261,700 - $203,800)	-$57,900.00
Decrease in prepaid expenses ($30,600 - $16,100)	$14,500.00
Increase in accounts payable ($244,300 - $177,600)	$66,700.00
Decrease in accrued liabilities ($17,600 - $9,300)	-$8,300.00
Increase in income tax payable ($52,400 - $45,500)	$6,900.00
Net Cash provided by operating activities		$160,660.00

Solution 2:

Rusco Company
Statement of Cash Flows
For year ended July 31
Particulars	Details	Amount
Cash Flow from Operating Activities:
Net Income	$92,360.00
Adjustments to reconcile net income to net cash provided by operations:
Depreciation Expense ($216,500 - $193,900 + $53,000)	$75,600.00
Gain on sale of investments	-$26,500.00
Loss on sale of equipment	$8,600.00
Increase in accounts receivables ($238,200 - $226,900)	-$11,300.00
Increase in inventory ($261,700 - $203,800)	-$57,900.00
Decrease in prepaid expenses ($30,600 - $16,100)	$14,500.00
Increase in accounts payable ($244,300 - $177,600)	$66,700.00
Decrease in accrued liabilities ($17,600 - $9,300)	-$8,300.00
Increase in income tax payable ($52,400 - $45,500)	$6,900.00
Net Cash provided by operating activities		$160,660.00
Cash Flow from Investing Activities:
Proceed from sale of equipment	$54,400.00
Proceed from sale of investment	$82,500.00
Cash paid for purchase of Plant and equipment ($886,000 - $763,000 + $116,000)	-$239,000.00
Net Cash used in Investing activities		-$102,100.00
Cash Flow from Financing Activities:
Proceed from issue of common stock ($702,500 - $665,000)	$37,500.00
Dividend Paid ($232,300 + $92,360 - $95,000)	-$229,660.00
Proceed from issue of bond ($239,000 - $126,000)	$113,000.00
Net Cash Provided by financing activities		-$79,160.00
Net Increase / (Decrease) in Cash		-$20,600.00
Cash balance at beginning of year		$48,600.00
Cash balance at end of year		$28,000.00

Solution 3:

Free cash flow = Cash from operating activities - Capital expenditure

= $160,660 - $239,000 = ($78,340)